Avoid Making These Mistakes When Planning To Flip A House
According to plenty of television shows out there (we’re looking at you, HGTV!), house flipping is like following the yellow brick road to the Wizard of Oz: with just a few quick and easy steps you’ll be on the path to making your dreams come true, thanks to some easy money. But before you start scouring local real estate listings to secure that perfect flip, be sure to avoid these three common mistakes that can turn your dream flip into a house of financial horrors.
Not Preparing Financially
Before you waltz into your bank with papers in order, verifications complete, and visions of easy money dancing in your head, it’s important to understand that securing a mortgage for a flip isn’t always a simple process. A bank will typically lend only 80% of what they believe the house is worth. The news is even more distressing if you’re buying a distressed property: you’ll need to provide a 20% down payment, plus the cost of any anticipated repairs, and a bank most likely won’t fund both the cost of repairs and a mortgage. If a home requires major repairs (foundation or structural damage fall into this category), the bank can require you to complete those repairs before you receive funding in order to ensure that the bank’s investment is secure.
To be in the best position to recoup the money you’re planning to invest in flipping, make sure you have good credit and sufficient cash to fund all the repairs necessary for the successful reselling of the home. Without thorough financial preparation, you could find yourself midway through the flip with not enough money left to complete the project.
Purchasing A Home That Needs Too Many Repairs
Time is money, as the saying goes, and when it comes to flipping a house you need to accurately assess how much time and money the repairs and renovation will cost. Successful flippers generally apply the 70% rule: Plan to pay no more than 70% of the estimated value of the home after the renovations are complete (known as after-repair value) minus the cost of needed repairs.
Have the home thoroughly inspected before deciding to purchase it so that you can take into account the full extent of repairs, large and small. Unanticipated repairs can sink your budget, and bury your expected profits.
Overlooking All Of The Important Costs
The purchase price of a house isn’t the only cost you need to consider when looking to flip a home. Overlooked expenses can send your budget tumbling into the red. First on the list: consider contractor costs for all of the jobs needed to get the home in shape, unless you plan on completing the renovations yourself. You might be surprised at the cost of both labor and materials.
Second, determine how much you’ll have to pay out to hold the home during the renovation. Home insurance, utilities, property taxes, applicable association fees, and maintaining the yard and exterior (snow removal and lawn mowing top the list) are costs that can add up quickly, especially if the flip takes more time than originally anticipated.
Third, don’t overlook the costs associated with actually selling the home when you’re ready to put it on the market. In addition to paying closing costs, you might be asked to pay for the buyer’s agent commissions, regardless of whether or not you use an agent.
So before you go out and start flipping homes, do plenty of research on all of the aforementioned items. If done right, you can certainly create a lucrative business.